Coronavirus: Bank of England to finance additional UK government spending

A man stands in the evening sun outside the Bank of England in London. (Daniel Leal-Olivas/AFP via Getty Images)

The Bank of England will expand an overdraft-like facility used by the UK government during the coronavirus pandemic, suggesting that it will directly fund additional spending during the crisis.

The increase in the size of the facility, which has not been used to any great degree since the 2008 financial crisis, has not been disclosed.

It usually allows the government to borrow £400m ($495m) in short bursts, and was used to borrow £19.9bn in 2008 alone.

HM Treasury said on Thursday that the extension of its Ways and Means facility with the central bank would provide a short-term source of cashflow to the government.

The extraordinary move highlights the immense funding pressure being placed on the government during the pandemic, and significantly reduces its need to finance short-term spending needs by borrowing on bond or sterling money markets.

Using such markets to support day-to-day cash flow operations during a crisis can be both difficult and costly, and bond yields have fluctuated significantly in recent weeks.

By the start of this month, the government said it wanted to raise £45bn from markets in April, up from previously planned borrowing of £15bn.

The government has introduced extraordinary measures to support the UK economy throughout the crisis, including unprecedented wage subsidies for furloughed employees.

UK firms could furlough up to 11 million workers, costing the government between £30bn and £40bn, according to analysis by the Resolution Foundation think tank.

The use of a central bank to fund government spending — often called monetary financing — will likely face criticism and raise fears about spiraling inflation.

Monetary financing twice led to the collapse of Germany’s monetary system, and Bank of England governor Andrew Bailey said as recently as Sunday that its long-term use “would damage credibility on controlling inflation by eroding operational independence.”

Any use of the facility would be “temporary and short-term,” and will be repaid by the end of 2020, the Treasury said on Thursday.

Last month, Bailey said that the Ways and Means facility was merely a “historical feature” of the UK monetary system, suggesting it was not a “frontline tool” that would need to be used to finance short-term government spending.

“I don’t think at the moment we’re facing an inability of the government to fund itself,” he said.

The Treasury noted that it would nevertheless “continue to use the markets as its primary source of financing,” and said that its response to the crisis would be “fully funded” by additional borrowing through its normal operations.

The pound was largely flat on Thursday morning, and rose just 0.1% against the dollar to just over $1.24 (GBPUSD=X).

Though the Ways and Means facility had traditionally been used on a daily basis by the UK government, use of the account has declined significantly since the Debt Management Office began managing the Treasury’s cash needs in 2000.

The facility has nevertheless been used on a number of occasions since then by the government.